An informed and thought-provoking analysis of what lies behind the headlines and headaches of business ethics and corporate social responsibility

Monday, April 1, 2013

Why India’s Novartis ruling is good for innovation

Today’s
news that the Indian supreme court has effectively denied the Swiss multinational
pharmaceutical company Novartis the patent protection for its ‘new’ blood cancer
drug Glivec (Gleevec in North America) has been discussed controversially in
the media. On the one hand, commentators sympathetic to the industry have
pointed out that without patent protection a publicly owned company loses its incentive
to develop new drugs. Pharmaceutical innovation, so the argument goes, is
driven by the hope of future returns. Since development of new drugs is very
costly, time consuming and competitive, companies can hardly justify
investments when rulings such as today's kill
their hopes of recouping the costs through future sales. In short, the Indian
ruling "will hinder medical progress" (Novartis press release) and thus kills innovation.

On the
other hand, activists and other voices critical of the industry argue that this
is a win for all those that have the interest of poor people and their access
to affordable drugs in mind. After all, a year’s supply for Glivec for a leukemia
patient currently comes at a whopping $70,000, while Indian generics can do the same job for about $2,500! (Generics btw. are drugs, that use the same chemical recipe as the original and can be sold much
cheaper as the generics company does not have to cover the R&D costs) For India, which has the biggest generics
industry in the world, this ruling of course has also a very national commercial
interest...

What most
commentators are missing though in their evaluation of the case is a somewhat
minute detail, which however has huge ethical implications. The crucial point
here is whether the version of Glivec for which Novartis was claiming patent
protection, is actually a ‘new’ drug. What the Indian supreme court in fact
ruled was not that Novartis should not enjoy patent protection on their new
drugs; they mainly concluded that the new edition of Glivec, for which the
company applied for protection, was in fact not sufficiently ‘new’, not
different enough from the old version of Glivec, for which the patent had
expired.

This points
to a well know strategy of the pharmaceutical industry. Rather than fighting
generic companies, ‘originator’ companies such as Novartis just marginally
change the chemical formula of an existing drug whose patent is about to expire
and then pretend to having come up with an entirely new one, for which of course
they should enjoy full patent protection.

This, however, is just one trick pharmaceutical companies use in fighting generic
companies. The EU Commission on Competition has had an eye on the practices of
the industry in circumventing patent law for a long time. Their 2009 report is an inspiring read which sheds an interesting light on the claim, that it is the
generics companies that stifle innovation (as rehearsed today on BBC, CNN and
the likes).

Basically, companies
such as Novartis and other ‘originators’ are using a whole host of ‘defensive
patenting strategies’ and the use of ‘second generation products’ ruled out
today in India is just one of them. Others include the filing of numerous
patent applications for the same medicine (forming so called 'patent clusters' or 'patent thickets'). This is an important tool to prevent
competitors in advance to develop new medicine as the potential new drug would
already be covered by the patent right filed in advance by another competitor.

All in all,
the EU Commission identified a host of industry strategies all of which resulted
in numerous "situations where innovation was effectively blocked” (p. 19). So in
reality, what Novartis was stopped doing – at least in India – is not so much
about innovating for new drugs, but rather one element of a
rich toolbox of strategies to stifle and preventinnovation while protecting
patents and thus the profits of the company.

After all
then, today’s ruling may indeed result in more real innovation. Rather than
focusing their R&D teams on insignificant changes in existing drugs which
may satisfy the legal team of the company to file a new patent application, Novartis and other pharmaceuticals might take this event as an incentive to
actually develop new drugs that address hitherto unaddressed and untreatable
diseases. One of the reasons the Bill and Melinda Gates foundation is so active in
developing new drugs for the diseases of the poor (such as malaria) has to do with the fact that
pharmaceutical innovation is too much driven by potential economic benefits of
future drugs. And of course the diseases of the poor are bad for the business
case of a drug.

This problem
now hits a company whose outgoing CEO just had to
turn down a $78m severance package - reacting to public outrage in Switzerland. After all, a company that can afford such
golden handshakes for their CEO in the first place can’t be ailing too badly
from all those third world generics producers...

(An edited version of this blog was published as an Op-Ed in the Globe and Mail, April 2, 2013).Photo by Images_of_Money, reproduced under the Creative Commons License.

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Andrew Crane [L] and Dirk Matten [R]

Welcome to the Crane and Matten blog - for informed commentary and expert analysis on the everchanging world of corporate responsibility.

We are two business school professors best known for our books and research articles on business ethics and corporate citizenship. We wrote the Crane and Matten blog from 2008-2015, offering unique insight on a range of issues from across the globe.

Andrew Craneis Professor of Business and Society in the School of Management, University of Bath.

Dirk Matten is the Hewlett Packard Chair in Corporate Social Responsibility in the Schulich School of Business, York University.